Profitability Ratios Explained

ROE (Return on Equity):

  • This is like looking at how well a business is using the money invested by its owners (shareholders).
  • Formula: ROE = (Net Income / Shareholders’ Equity) * 100
  • Example: If a company has a net income of ₹500,000 and shareholders’ equity of ₹2,000,000, then the ROE would be:
    ROE = (₹500,000 / ₹2,000,000) * 100 = 25%
  • Interpretation: This means the company is generating a 25% return on the equity invested by shareholders.

ROCE (Return on Capital Employed):

  • Think of this as checking how much money a business makes with all the funds it uses, including what it borrowed and what the owners invested.
  • Formula: ROCE = (Operating Profit / Capital Employed) * 100
  • Example: If a company’s operating profit is ₹800,000, and its capital employed (including equity and long-term debt) is ₹4,000,000, then the ROCE would be:
    ROCE = (₹800,000 / ₹4,000,000) * 100 = 20%
  • Interpretation: A 20% ROCE indicates that the company is earning a 20% return on the total capital employed in its operations.

Operating Profit Margin

  • Operating Profit Margin is like looking at how efficiently a company is making money from its core business activities.
  • Formula: Operating Profit Margin = (Operating Profit / Total Revenue) * 100
  • Example: If a company has an operating profit of ₹400,000 and total revenue of ₹1,000,000, then the operating profit margin would be:
    Operating Profit Margin = (₹400,000 / ₹1,000,000) * 100 = 40%
  • Interpretation: A 40% operating profit margin means that for every ₹1 of revenue, the company retains ₹0.40 as profit after considering the expenses directly related to its main operations. It indicates how efficiently the company is managing its core business.

Net Profit Margin:

  • This is like checking how much money a business keeps after paying all its bills, like rent, taxes, and ingredients.
  • Formula: Net Profit Margin = (Net Profit / Total Revenue) * 100
  • Example: If a company’s net profit is ₹200,000, and its total revenue is ₹1,500,000, then the net profit margin would be:
    Net Profit Margin = (₹200,000 / ₹1,500,000) * 100 = 13.33%
  • Interpretation: This means the company retains 13.33% of its total revenue as profit after accounting for all expenses, including taxes.

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